What must companies do differently to increase the probability of a successful integration?
With mergers and acquisitions (M&A) as an embedded growth strategy for companies across all industries, businesses are constantly searching for opportunities to leverage economies of scale and enhance their existing product/service portfolio. However, most research conducted on M&A performance measures shows that 65-75% of all M&A deals fail to meet margin and growth goals.
Think about that for a second.
A common growth strategy utilized by many successful companies fails to meet the expected growth and profitability measures at least two-thirds of the time! This holds true for conglomerates engaged in large scale acquisitions and for private equity firms focused on smaller scale acquisitions as part of a buy-and-build strategy. Logically, a strategy with such high of a failure rate is a target for rejection by any board member. However, the potential value in combining two or more synergistic businesses is too great to ignore.
There is not a magic answer for ensuring the success of every M&A transaction, but it is easily imaginable that a CEO who oversees three M&A transactions in their career would not be satisfied if only one was deemed a success. Admittedly, there are certain unforeseeable influences out of the acquiring company’s control. Changes in the economic or regulatory environment can negatively impact financial performance of the newly combined company. Conversely, there are many activities within the M&A lifecycle that a company can control to positively impact results.
To improve the probability of successfully combining two or more businesses, executives must identify where their organization’s greatest deficiencies exist related to executing activities within the M&A lifecycle. In other words, what must you do differently to increase your M&A success rate?
Acquiring companies typically invest a significant amount of focus and effort to perform the target identification, due diligence, and synergy assessment phases of an M&A transaction. It is vital for these activities to be performed well to ensure the company is making a sound business decision for its shareholders. As such, many companies have become extremely adept at identifying and valuing takeover targets. However, the focus and planning for integration is often overlooked.
Our experience shows the greatest improvement opportunity for companies during the M&A lifecycle is to increase the focus on planning for post-merger integration activities. This includes creating a robust integration playbook. A robust integration playbook should provide a holistic strategy and approach for performing integration activities.
Naturally, an integration playbook should align with the long-term strategy for the newly combined company. The integration playbook should take into account how the acquired company's organization, enabling technologies, and business processes will be integrated to meet long-term operational and financial objectives. Without the right playbook, integration teams are unprepared to address the realities they will encounter. So what exactly are these hidden integration realities that companies will run into and how should they be addressed?
Arguably, the most critical and complex factor to the long-term success of an integration is how the newly combined organization will be designed. This includes determining whether to integrate the new business into an existing brand or let the business continue to run as its legacy brand. A common mistake many companies make is to simply look at role redundancies and begin to slash names without performing a skills assessment or evaluation. Acquiring companies tend to underestimate the impact differences in culture will have on how employees acclimate to the new organization.
For example, a company in the engineering and construction industry dealt with the side effects associated with organization integration activities. After years of serial acquisitions and the substantial resulting growth, the company didn't realize expected synergies. A closer look at the situation revealed that the company did not develop an organization strategy prior to integrating each of the acquisitions. Each business acted as its own stand-alone entity, which resulted in a duplication of roles and unclear responsibilities related to ownership of key business processes. Each of these factors significantly drove up the cost of doing business.
There is no such thing as over-planning when it comes to preparing for the integration of a new organization. Acquiring companies must create an organization strategy and integration plan that incorporates the following items:
Accounting for the considerations above can assist with driving long-term success of the newly combined company. This includes ensuring proper alignment of people and roles, investing in training, and mitigating key causes of employee turnover.
Many companies incorrectly assume acquired company's business processes can be integrated with the newly combined business to achieve economies of scale. However, acquiring companies often find existing business processes are not scalable, not compliant in some areas and pose significant business risk.
For example, an acquiring company may assume the safety processes of the acquired company can be integrated without modification or additional cost. The reality is that the integration team will most likely find the processes require additional rigor to meet business and compliance requirements. These process changes will require additional resources and technology, negatively impacting the performance measures of the newly combined company.
A global manufacturing company made a significant acquisition. Following the integration, the company quickly realized the acquired company's existing quality assurance processes did not comply with global requirements. The company was forced to establish more stringent processes and systems, which required additional employees to meet global standards. The cost of the new systems and resources had an unforeseen negative impact on the profitability of the new entity.
Companies must create a plan for assessing business processes to determine where potential risks or added complexities exist. A common example of an added complexity is the logistics associated with providing products/services to customers in new geographical locations. In addition, performing business in new locations typically results in the need to create processes for statutory and other compliance information requirements. Conducting necessary planning and incorporating the right business process considerations into the integration playbook can greatly improve the long-term profitability of the newly combined company.
Integration teams typically face the challenge of integrating an acquired company’s systems and data with the new parent company.
Teams often assume the newly combined company can operate on a single ERP platform without compromising business requirements. Although the new company might save technology support costs by combining ERP platforms, administrative costs can rise in the acquired business unit. An acquired company in this situation will create workarounds, custom solutions, and bolt-on systems to meet their needs.
For example, a global oilfield services company purchased a wireline business to add to its product offerings. The wireline business was forced to adopt the global ERP sales order system. The sales order templates in the global ERP system did not have the ability to capture billing information required by the wireline business customers. Each of the wireline business divisions and field offices were forced to create manual invoices. The additional procedures had a significant impact on resource requirements in the business units and negatively impacted collections. This is a prime example of an integration approach focused solely on meeting short-term integration objectives. The company is now faced with the decision of maintaining status quo or investing millions to customize the proper solution for the wireline business.
The optimal way to address the reality of system integration is to properly assess requirements and develop a future state strategy for how the newly combined company will utilize enabling technologies. In our experience, when making decisions related to integrating technology, companies often fail to account for their long-term growth strategy and additional complexities added by the acquired company. Common examples of added technology complexities include:
There are times when enabling technologies can be rationalized and a single, integrated ERP system can be utilized. The decision must be vetted to ensure the systems selected for the newly combined company meet business requirements and facilitate the company’s long-term strategy.
Companies continue to grow through mergers and acquisitions. The long-term success of these transactions can be dramatically improved by adequately planning for the realities of integration. Creating a detailed and robust integration playbook, which incorporates the key considerations mentioned in this article, is a critical step to success.
